"This is the first step in the public, ugly dismantling of one of the most storied companies in our business," says an observer.

Ziff Davis Media Inc. announced that it is exploring options to restructure its debt and will not make the scheduled interest payment due today on its senior subordinated compounding notes due in 2009.

Ziff Davis had been carrying long-term debt of about $390 million. "This is the first step toward restructuring our debt," says CEO Jason Young. "We elected not to make the payment under the grace period in our deal. We took on a debt load and capital structure in 2000 in a time that was very different for this business than it is now."

The company has retained corporate turnaround and bankruptcy specialists Alvarez & Marsal and Kirkland & Ellis LLP as advisors. Alvarez & Marsal have been credited with reinvigorating companies such as Levi Straus and turning around HealthSouth Corp. after accusations for accounting fraud. Asked if the next step for Ziff was to file bankruptcy, Young told FOLIO: Alert, "We expect we’ll be able to restructure our debt outside of the courts."

Beginning of the End?

However, some financial observers have a darker take. "This is the first step in the public, ugly dismantling of one of the most storied companies in our business," says one source, who described Alvarez & Marsal as the "absolute last ditch in bankruptcy advisors."

Two weeks ago, Ziff Davis closed on its $150 million sale of its Enterprise Group, and named Young as CEO, replacing Robert Callahan, who remained as chairman. Ziff’s Enterprise Group had been characterized as the easier sell among the three Ziff divisions on the block. The $62.3 million Consumer/Small Business Group and the $39.1 million Games Group generate less revenue than the $79.6 million Enterprise Group.

"The debt had actually been holding up during the sales process but now they have to admit they couldn’t sell the business to cover the debt," says the source. "They’re now going to enter a process of long negotiation. The distress fund guys are going to come in and buy it at 50 cents on the dollar and try to sell it for 75 cents. Jason is a good guy and he’s done a terrific job operating the business but this is totally outside his realm of expertise. This is going to be between Willis Stein, Alvarez and the lawyers." Still, Young says this is about Ziff moving forward. "The toughest job that faced Ziff Davis has largely been accomplished;which was transforming our operating business over the last six years and putting it in place," says Young. "We now have faster-than-market growth in the all important digital segment. Our decision to restructure our debt, which in turn will give us even more headroom to operate and grow faster, is a financial process that we have great resources aligned to help us execute. I’m very confident in our prospects, our competitive edge, and most of all, our people."